Expected Returns: An Investor's Guide to Harvesting Market Rewards

965 Pages·2011·10.4 MB·English

by  Antti Ilmanen

Table of Contents

Title Page
Copyright Page
Foreword
Dedication
Acknowledgments
Abbreviations and acronyms
Disclaimer
Part I - Overview, historical returns, and academic theories

Chapter 1 - Introduction
1.1 HISTORICAL PERFORMANCE
1.2 FINANCIAL AND BEHAVIORAL THEORIES: A BRIEF
HISTORY OF IDEAS
1.3 FORWARD-LOOKING INDICATORS
1.4 VIEW-BASED EXPECTED RETURNS
1.5 GENERAL COMMENTS ABOUT THE BOOK
1.6 NOTES
Chapter 2 - Whetting the appetite: Historical averages and forward-looking
returns
2.1 HISTORICAL PERFORMANCE SINCE 1990
2.2 SAMPLE-SPECIFIC RESULTS: DEALING WITH THE PITFALLS
2.3 FORWARD-LOOKING RETURN INDICATORS
2.4 NOTES
Chapter 3 - The historical record: The past 20 years in a longer perspective
3.1 STOCKS
3.2 BONDS
3.3 REAL ASSET INVESTING AND ACTIVE INVESTING
3.4 FX AND MONEY MARKETS
3.5 REAL RETURN HISTORIES
3.6 NOTES
Chapter 4 - Road map to terminology
4.1 CONSTANT OR TIME-VARYING EXPECTED RETURNS?
4.2 RATIONAL OR IRRATIONAL EXPECTATIONS FORMATION?
4.3 RETURN MEASUREMENT ISSUES
4.4. RETURNS IN WHAT CURRENCY?
4.5 RISK-ADJUSTED RETURNS
4.6 BIASED RETURNS
4.7 NOTES
Chapter 5 - Rational theories on expected return determination
5.1 THE OLD WORLD
5.2 THE NEW WORLD
5.3 DETOUR: A BRIEF SURVEY OF THE EFFICIENT MARKETS
HYPOTHESIS
5.4 NOTES
Chapter 6 - Behavioral finance
6.1 LIMITS TO ARBITRAGE
6.2 PSYCHOLOGY
6.3 APPLICATIONS
6.4 CONCLUSION
6.5 NOTES
Chapter 7 - Alternative interpretations for return predictability
7.1 RISK PREMIA OR MARKET INEFFICIENCY
7.2 DATA MINING AND OTHER “MIRAGE” EXPLANATIONS
7.3 NOTES
Part II - A dozen case studies
Chapter 8 - Equity risk premium
8.1 INTRODUCTION AND TERMINOLOGY
8.2 THEORIES AND THE EQUITY PREMIUM PUZZLE
8.3 HISTORICAL EQUITY PREMIUM
8.4 FORWARD-LOOKING (EX ANTE OBJECTIVE) LONG-TERM
EXPECTED RETURN MEASURES
8.5 SURVEY-BASED SUBJECTIVE EXPECTATIONS
8.6 TACTICAL FORECASTING FOR MARKET TIMING
8.7 NOTES
Chapter 9 - Bond risk premium
9.1 INTRODUCTION, TERMINOLOGY, AND THEORIES
9.2 HISTORICAL AVERAGE RETURNS
9.3 ALTERNATIVE EX ANTE MEASURES OF THE BRP
9.4 YIELD CURVE STEEPNESS: IMPORTANT PREDICTIVE
RELATIONS
9.5 EXPLAINING BRP BEHAVIOR: FIRST TARGETS, THEN FOUR
DRIVERS
9.6 TACTICAL FORECASTING—DURATION TIMING
9.7 NOTES
Chapter 10 - Credit risk premium
10.1 INTRODUCTION, TERMINOLOGY, AND THEORY
10.2 HISTORICAL AVERAGE EXCESS RETURNS
10.3 FOCUS ON FRONT-END TRADING—A POCKET OF
ATTRACTIVE REWARD TO RISK
10.4 UNDERSTANDING CREDIT SPREADS AND THEIR DRIVERS
10.5 TACTICAL FORECASTING OF CORPORATE BOND
OUTPERFORMANCE
10.6 ASSESSING OTHER NON-GOVERNMENT DEBT
10.7 CONCLUDING REMARKS
10.8 NOTES
Chapter 11 - Alternative asset premia
11.1 INTRODUCTION TO ALTERNATIVES
11.2 REAL ESTATE
11.3 COMMODITIES
11.4 HEDGE FUNDS
11.5 PRIVATE EQUITY FUNDS
11.6 NOTES
Chapter 12 - Value-oriented equity selection
12.1 INTRODUCTION TO DYNAMIC STRATEGIES
12.2 EQUITY VALUE: INTRODUCTION AND HISTORICAL
PERFORMANCE
12.3 TWEAKS INCLUDING STYLE TIMING
12.4 THE REASONS VALUE WORKS
12.5 DOES THE VALUE STRATEGY WORK IN EQUITIES BEYOND
INDIVIDUAL STOCK SELECTION ...
12.6 RELATIONS BETWEEN VALUE AND OTHER INDICATORS
FOR EQUITY SELECTION
12.7 NOTES
Chapter 13 - Currency carry
13.1 INTRODUCTION
13.2 HISTORICAL AVERAGE RETURNS
13.3 IMPROVEMENTS/REFINEMENTS TO THE BASELINE CARRY
STRATEGY
13.4 WHY DO CARRY STRATEGIES WORK?
13.5 CARRY HERE, CARRY THERE, CARRY EVERYWHERE
13.6 NOTES
Chapter 14 - Commodity momentum and trend following
14.1 INTRODUCTION
14.2 PERFORMANCE OF SIMPLE COMMODITY MOMENTUM
STRATEGIES
14.3 TWEAKS
14.4 WHY DOES MOMENTUM—SUCH A NAIVE STRATEGY—
WORK?
14.5 MOMENTUM IN OTHER ASSET CLASSES
14.6 NOTES
Chapter 15 - Volatility selling (on equity indices)
15.1 INTRODUCTION
15.2 HISTORICAL PERFORMANCE OF VOLATILITY-TRADING
STRATEGIES
15.3 TWEAKS/REFINEMENTS
15.4 THE REASONS VOLATILITY SELLING IS PROFITABLE
15.5 OTHER ASSETS
15.6 NOTES
Chapter 16 - Growth factor and growth premium
16.1 INTRODUCTION TO UNDERLYING FACTORS IN CHAPTERS
16–19
16.2 INTRODUCTION TO THE GROWTH FACTOR
16.3 THEORY AND EVIDENCE ON GROWTH
16.4 ASSET MARKET RELATIONS
16.5 TIME-VARYING GROWTH PREMIUM
16.6 NOTES
Chapter 17 - Inflation factor and inflation premium
17.1 INTRODUCTION
17.2 INFLATION PROCESS—HISTORY, DETERMINANTS,
EXPECTATIONS
17.3 INFLATION SENSITIVITY OF MAJOR ASSET CLASSES AND
THE INFLATION PREMIUM
17.4 TIME-VARYING INFLATION PREMIUM
17.5 NOTES
Chapter 18 - Liquidity factor and illiquidity premium
18.1 INTRODUCTION
18.2 FACTOR HISTORY: HOW DOES LIQUIDITY ITSELF VARY
OVER TIME?
18.3 HISTORICAL EVIDENCE ON AVERAGE LIQUIDITY-
RELATED PREMIA
18.4 TIME-VARYING ILLIQUIDITY PREMIA
18.5 NOTE
Chapter 19 - Tail risks (volatility, correlation, skewness)
19.1 INTRODUCTION
19.2 FACTOR HISTORY
19.3 HISTORICAL EVIDENCE ON AVERAGE ASSET RETURNS
VS. VOLATILITY AND CORRELATION
19.4 THEORY AND EVIDENCE ON THE SKEWNESS PREMIUM
19.5 VERDICT ON WHY HIGH-VOLATILITY ASSETS FARE SO
POORLY
19.6 TIME-VARYING PREMIA FOR TAIL RISK EXPOSURES
19.7 NOTES
Part III - Back to broader themes

Chapter 20 - Endogenous return and risk: Feedback effects on expected returns
20.1 FEEDBACK LOOPS ON THE DIRECTION OF RISKY ASSETS
20.2 FEEDBACK LOOPS ON LESS DIRECTIONAL POSITIONS
20.3 AGENDA FOR MARKET-TIMERS AND RESEARCHERS
20.4 NOTES
Chapter 21 - Forward-looking measures of asset returns
21.1 POPULAR VALUE AND CARRY INDICATORS AND THEIR
PITFALLS
21.2 BUILDING BLOCKS OF EXPECTED RETURNS
21.3 NOTES
Chapter 22 - Interpreting carry or non-zero yield spreads
22.1 INTRODUCTION
22.2 FUTURE EXCESS RETURNS OR MARKET EXPECTATIONS?
22.3 EMPIRICAL HORSE RACES FOR VARIOUS ASSETS
22.4 CONCLUSIONS
22.5 NOTES
Chapter 23 - Survey-based subjective expected returns
23.1 NOTES
Chapter 24 - Tactical return forecasting models
24.1 INTRODUCTION
24.2 WHAT TYPE OF MODEL?
24.3 WHICH ASSETS/TRADES?
24.4 WHICH INDICATOR TYPES?
24.5 ENHANCEMENTS AND PITFALLS
24.6 NOTES
Chapter 25 - Seasonal regularities
25.1 SEASONAL, CYCLICAL, AND SECULAR PATTERNS IN
ASSET RETURNS
25.2 MONTHLY SEASONALS AND THE JANUARY EFFECT
25.3 OTHER SEASONALS
Chapter 26 - Cyclical variation in asset returns
26.1 TYPICAL BEHAVIOR OF REALIZED RETURNS AND EX
ANTE INDICATORS THROUGH THE ...
26.2 TYPICAL BEHAVIOR OF REALIZED RETURNS AND EX
ANTE INDICATORS ACROSS ...
26.3 NOTES
Chapter 27 - Secular trends and the next 20 years
27.1 CONTRASTING 1988–2007 WITH 1968–1987
27.2 REVERSIBLE AND SUSTAINABLE SECULAR TRENDS
27.3 THE NEXT 20 YEARS
27.4 NOTES
Chapter 28 - Enhancing returns through managing risks, horizon, skill, and costs
28.1 INTRODUCTION: HOW CAN INVESTORS ENHANCE
RETURNS?
28.2 RISK
28.3 INVESTMENT HORIZON
28.4 SKILL
28.5 COSTS
28.6 NOTES
Chapter 29 - Takeaways for long-horizon investors
29.1 KEY TAKEAWAYS FROM THEORY
29.2 EMPIRICAL RETURN SOURCES
29.3 MY TAKE ON KEY DEBATES
29.4 KNOW THYSELF: LARGE LONG-HORIZON INVESTORS’
NATURAL EDGES
29.5 INSTITUTIONAL PRACTICES
29.6 NOTES
Appendix A - World wealth
Appendix B - Data sources and data-series construction
Bibliography
Index